Valuing housing

House valuesOn Wednesday this year’s Housing Studies Association conference featured a panel discussion on the theme “Who is best placed to judge the value of housing – the state or the consumer?”. The panel members were Vidhya Alakeson of the Resolution Foundation; John Moss, a Councillor at LB Waltham Forest; Paul Tennant of Orbit Group and the Chartered Institute of Housing; and me.

I spoke first. My talk was rather more abstract than those of the other panel members, and perhaps more abstract than the organisers were expecting. But it was the direction my thinking took when I was preparing what I was going to say.

Here’s the text accompanying what I said on the day:

So my first inclination here was to dismantle the exam question we’ve been set. “Value”, “housing”, “the state”, “consumer” – these are all concepts that are ambiguous. They could all benefit from being unpacked. But that could take up my allotted time. However, without adding some further structure, the question is more difficult to answer than it might first appear.

An alternative way to approach it is to ask: What’s the problem we’re trying to deal with here?

That led me to frame another question: Under what conditions is it the consumer or the state whose valuation of housing might be the more accurate?

And, like a good liberal, that led me to formulate the question so it starts from the perspective of the individual: Why might consumers’ choices based on the values they place on housing not lead to social optimal levels of housing consumption? This feels like a question we’re more used to grappling with. Why might households consume too little housing? Why might they consume too much?

Possible reasons for households consuming too little housing are failures of information or failures of rationality. Households may lack information on available housing options. Or they may lack an understanding of the negative impacts of consuming insufficient housing – the consequences of overcrowding, poor quality or insecurity – and hence expose themselves to risks unwittingly. Alternatively, we might consider that households lack the capacity to make appropriate decisions about their housing consumption.

How plausible are these problems? It is certainly possible that households, even if they are aware of problems can create in the short-term, are unaware of the persistent and long-term negative impacts of poor housing. We might also need a more refined understanding of who the consumer is or what the problem is. Many of the most negative consequences of poor housing affect children. Yet there is a principal-agent relationship between parent and child. Are we sure that parents will make housing consumption decisions in full knowledge of the consequences for their children? If not then that might open up a space for considering state action.

Back when I started in housing research there was much talk of housing as a merit good. The definition of a merit good is one for which households’ consumption decisions result in a level of consumption below that deemed to be socially desirable. Colleagues such a Peter King have argued forcefully and at some length that this implies a view of households’ capacities and limitations that is difficult to sustain. After all, most people satisfy their housing requirements through the private market. Most people are acutely aware of the health consequences – both physical and mental – of inadequate space, privacy, and security. Most people understand that a settled home, or its absence, has a profound impact upon almost all aspects of their life. It can be integral to their sense of identity.

So we don’t tend to talk about housing in merit good terms quite as much these days.

We might, on the other hand, reflect upon the observation that the vast majority of households are satisfied with their home, almost regardless of its condition. That is an observation that might be linked to the notion of habituation, drawn from behavioural economics. People will adjust their aspirations and assessment of particular states of affairs in order to remove dissonance. That suggests that while households may not choose to underconsume housing, they may adjust to finding themselves in poor circumstances or to deterioration. If that were a significant issue – and we don’t know that it is – it might put a question mark over how well grounded consumer valuations are.

We are now more likely to see the cause of households consuming too little housing as lying with a lack of income, rather than a lack of ability to make appropriate choices. Low household incomes mean much of a household’s limited income is of necessity directed towards non-housing expenditures. This results in people living in substandard – overcrowded or unsafe – accommodation. The policy response here is typically to consider redistributing income in order to make demand effective, rather than to supplant household decision-making.

But even here there is room for further reflection. There is a strand to this discussion which is relatively under-explored. When we talk about substandard housing we more rarely consider whose standards. And whether they are standards that everyone is signed up to. It may be that those migrating from other parts of the world bring with them different presumptions about acceptable levels of housing consumption and the trade-offs to be made between housing and non-housing consumption. Which standards should prevail? Is this a route through which merit good-type concerns re-enter the discussion? Not because people are not able to make decisions, but because a judgement has been made that those decisions are unacceptable.

The arguments for household decision-making being inadequate are perhaps not powerful – claims that households fail to understand the private costs and benefits of adequate housing consumption are less than compelling. It is when we turn to the question of whether private costs and benefits are well aligned to social costs and benefits that we might find ourselves on firmer ground.

Consumption of inadequate housing by families can have a negative impact upon educational achievement and impair not only the ability of those children to achieve their potential but also, as a consequence, the future productive capacity of the economy. Inadequate housing can also generate localised negative externalities. Perhaps more significantly, household level decisions based on private costs and benefits place little or no weight on the aggregate consequences of individual choices. The example that springs most readily to mind would be processes of spatial segregation, which in turn risk undermining social cohesion. We might also consider the longer-term consequences of housing decisions made with an eye to accumulation.

Indeed, expectations or aspirations of capital accumulation would be one of the circumstances in which we will observe household consuming “too much” housing relative to the social optimum. There is a long running concern in the UK – re-emerging strongly at present – that the prospect of accumulation through house price growth leads households to over-investment in residential property, which is almost entirely unproductive. This has deleterious consequences for the performance of the national economy.

Another possibility – one I have been interested in for quite a while – is the distortion of individual housing decisions that would occur if households use housing to signal social position and if housing has strong positional good characteristics. This can lead to over-consumption relative to the level of housing that would be chosen if housing were not positional.

Of course, it is a separate question whether, if we feel there are grounds for thinking that consumers are likely to make socially suboptimal housing decisions, we believe the state is going to be able to value housing more accurately. Is the evidence base for the claim that the state can do a better job, rather than introduce substantial distortions of its own, particularly compelling? Do we think that the state does a good job of separating concrete housing policy concerns from political imperatives?

It is a further, separate, question as to what we think the state can do to move housing market closer to the social optimum. What sorts of interventions will make a positive difference?

The predominant response from economists in relation to underconsumption has been to advocate personal subsidies rather than to support the use of bricks and mortar subsidies. It strikes me that as a universal prescription this is facile.  It is, in principle, choice-preserving. But it ignores the structural and institutional context in which the government seeks to act.

Favouring personal subsidies in highly constrained housing markets simply leads to cost inflation, as we are witnessing pretty much continuously at the moment.

On the other hand, advocating new build as a means of expanding choice and moderating cost pressures needs to account – as Danny Dorling has recently suggested – for the way in which the underlying distribution of income and wealth is evolving. It may be that producing more market housing which is then purchased by those who are already accumulating wealth may simply accelerate the process of tenure transformation that is currently underway.

For these reasons, and no doubt others, it might well be that a return to bricks and mortar subsidies will be more fiscally prudent in the medium term and relying on the production of decommodified housing may well allow policy to target the problem of the housing underconsumption more effectively.

But experience suggests that policy shows considerable reluctance to revisit old solutions. And, although we are seeing the return of local authority construction on a discernible scale, it seems unlikely that politicians are going to embrace municipal housing as the solution. It strikes me that one way around this, that we don’t make a lot of use of in the UK, might be to make more use of revolving funds to underpin the construction of new properties and then turn them over to the market in the medium term, perhaps suitably covenanted to ensure continued affordability.

In relation to over-consumption, there are signs that the taxation debate – be it reforming council tax, reintroducing schedule A, or removing exemptions from capital gains tax – is starting to get a bit more serious. That has got to be a good thing. It will be interesting to see to what extent this issue features in the political debate over the coming months as we approach the General Election.

© chrisdorney – Fotolia.com

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